War Imminent in Straits of Hormuz? $200 a Barrel Oil?

Happy New Year everyone! I should be back on a regular posting schedule in about two weeks, and should have a new episode of R-Squared Energy TV up next week. For now, I offer the following timely guest post from OilPrice.com.

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War Imminent in Straits of Hormuz? $200 a Barrel Oil?

The pieces and policies for potential conflict in the Persian Gulf are seemingly drawing inexorably together.

Since 24 December the Iranian Navy has been holding its ten-day Velayat 90 naval exercises, covering an area in the Arabian Sea stretching from east of the Strait of Hormuz entrance to the Persian Gulf to the Gulf of Aden. The day the maneuvers opened Iranian Navy Commander Rear Admiral Habibollah Sayyari told a press conference that the exercises were intended to show “Iran’s military prowess and defense capabilities in international waters, convey a message of peace and friendship to regional countries, and test the newest military equipment.” The exercise is Iran’s first naval training drill since May 2010, when the country held its Velayat 89 naval maneuvers in the same area. Velayat 90 is the largest naval exercise the country has ever held.

The participating Iranian forces have been divided into two groups, blue and orange, with the blue group representing Iranian forces and orange the enemy. Velayat 90 is involving the full panoply of Iranian naval force, with destroyers, missile boats, logistical support ships, hovercraft, aircraft, drones and advanced coastal missiles and torpedoes all being deployed. Tactics include mine-laying exercises and preparations for chemical attack. Iranian naval commandos, marines and divers are also participating.

The exercises have put Iranian warships in close proximity to vessels of the United States Fifth Fleet, based in Bahrain, which patrols some of the same waters, including the Strait of Hormuz, a 21 mile-wide waterway at its narrowest point. Roughly 40 percent of the world’s oil tanker shipments transit the strait daily, carrying 15.5 million barrels of Saudi, Iraqi, Iranian, Kuwaiti, Bahraini, Qatari and United Arab Emirates crude oil, leading the United States Energy Information Administration to label the Strait of Hormuz “the world’s most important oil chokepoint.”

Thousands of miles to the west, adding oil to the fire, President Obama is preparing to sign legislation that, if fully enforced, could impose harsh penalties on all customers for Iranian oil, with the explicit aim of severely impeding Iran’s ability to sell it.

How serious are the Iranians about the proposed sanctions and possible attack over its civilian nuclear program and what can they deploy if push comes to shove? According to the International Institute for Strategic Studies’ The Military Balance 2011, Iran has 23 submarines, 100+ “coastal and combat” patrol craft, 5 mine warfare and anti-mine craft, 13 amphibious landing vessels and 26 “logistics and support” ships. Add to that the fact that Iran has emphasized that it has developed indigenous “asymmetrical warfare” naval doctrines, and it is anything but clear what form Iran’s naval response to sanctions or attack could take. The only certainty is that it is unlikely to resemble anything taught at the U.S. Naval Academy.

The proposed Obama administration energy sanctions heighten the risk of confrontation and carry the possibility of immense economic disruption from soaring oil prices, given the unpredictability of the Iranian response. Addressing the possibility of tightened oil sanctions Iran’s first vice president Mohammad-Reza Rahimi on 27 December said, “If they impose sanctions on Iran’s oil exports, then even one drop of oil cannot flow from the Strait of Hormuz.”

Iran has earlier warned that if either the U.S. or Israel attack, it will target 32 American bases in the Middle East and close the Strait of Hormuz. On 28 December Iranian Navy commander Rear Admiral Habibollah Sayyari observed, “Closing the Strait of Hormuz for the armed forces of the Islamic Republic of Iran is very easy. It is a capability that has been built from the outset into our naval forces’ abilities.”

But adding an apparent olive branch Sayyari added, “But today we are not in the Hormuz Strait. We are in the Sea of Oman and we do not need to close the Hormuz Strait. Today we are just dealing with the Sea of Oman. Therefore, we can control it from right here and this is one of our prime abilities for such vital straits and our abilities are far, far more than they think.”

There are dim lights at the end of the seemingly darker and darker tunnel. The proposed sanctions legislation allows Obama to waive sanctions if they cause the price of oil to rise or threaten national security.

Furthermore, there is the wild card of Iran’s oil customers, the most prominent of which is China, which would hardly be inclined to go along with increased sanctions.

But one thing should be clear in Washington – however odious the U.S. government might find Iran’s mullahcracy, it is most unlikely to cave in to either economic or military intimidation that would threaten the nation’s existence, and if backed up against the wall with no way out, would just as likely go for broke and use every weapon at its disposal to defend itself. Given their evident cyber abilities in hacking the RQ-170 Sentinel drone and their announcement of an indigenous naval doctrine, a “cakewalk” victory with “mission accomplished” declared within a few short weeks seems anything but assured, particularly as it would extend the military arc of crisis from Iraq through Iran to Afghanistan, a potential shambolic military quagmire beyond Washington’s, NATO’s and Tel Aviv’s resources to quell.

It is worth remembering that chess was played in Sassanid Iran 1,400 years ago, where it was known as “chatrang.” What is occurring now off the Persian Gulf is a diplomatic and military game of chess, with global implications.

Washington’s concept of squeezing a country’s government by interfering with its energy policies has a dolorous history seven decades old.

When Japan invaded Vichy French-ruled southern Indo-China in July 1941 the U.S. demanded Japan withdraw. In addition, on 1 August the U.S., Japan’s biggest oil supplier at the time, imposed an oil embargo on the country.

It’s starting to become apparent that some clique within the Iranian government wants to start a war with the US. What else could explain the bomb plot against the Saudi Ambassador to Washington? The intent was to bomb the restaurant the Ambassador attended regularly, as well as several embassies in D.C. If successful, casualties would have been in the hundreds. Obama would have had little choice in how to respond.

The regime in Tehran is under such pressure that hardliners may think the only way to rally the nation behind them is through a war with the “Great Satan”. That’s scary as hell, because we’d win any war, but Iran could cause a great amount of destruction nonetheless.

It’s interesting that this article has completely ignored the fact that the European Union is also on the path for tighter sanctions and an oil embargo against Iran. Even Greece is now on-board(they were previously against it) and they get 14% of their oil imports from Iran. So, while it may not change the outcome, I find painting this picture as a US versus Iran affair disingenuous

I guess “perma-war” has become the stance of the US foreign policy-military establishment.

There was a time in US history when we actually had “peacetime.”

The federal foreign policy and military bureaucracies shrank after wars, and indeed shrank rapidly after WWII.

Then came the long Cold War with the Soviet Union—and federal bureaucracies learned how long-term wars were great for business, their business. A huge apparatus was set up that thrives to this day—even after the collapse of the Soviet Union.

Now we have the GWOT, and endless and incredibly expensive ($4 trillion and counting) undertaking with the goal of eliminating every terrorist on the globe—in other words, a perma-war.

No doubt Iran is truculent, and run by half-wits, but on the other hand we have warships steaming on their shores, and installed a puppet government in the nation next to them (Iraq). That might make anybody truculent.

Oddly enough, we might be hurting only ourselves with this “strategy.” If Iran was not a pariah nation, it might have developed its vast oil and gas fields, resulting in softer global oil and gas markets—and a higher standard of living in Iran, perhaps making for a more secular government.

Isolating Cuba for 60 years has not worked—what if instead we had relations with Cuba, and vacationed there, and welcomed Cubans here into our schools, baseball teams, trade relations, oil development, etc. Would not Cuba have Americanized?

This article seems biased towards a dark tunnel (and dim light) view. For example:
1. “The only certainty is that it is unlikely to resemble anything taught at the U.S. Naval Academy.”
I’m no sailor, but that’s a big insult to the Naval Academy. I suspect the opposite is true: there is very little that can happen that the Naval Academy hasn’t considered. Nothing is foolproof, but the US military spends a lot of time think about who might do what and how.
2. “The proposed Obama administration energy sanctions heighten the risk of confrontation and carry the possibility of immense economic disruption from soaring oil prices, given the unpredictability of the Iranian response.”
BS. Such a response would make Iran the first suicidal state in history. This is not Al Qaeda, it’s a government. Brave statements notwithstanding, I don’t see them starting a shooting match with the US Navy.
3. “The proposed sanctions legislation allows Obama to waive sanctions if they cause the price of oil to rise or threaten national security.”
Time for Obama to man up? Here I’d agree with the pessimists. Or maybe we’ll see another release from the SPR?
4. “But one thing should be clear in Washington – however odious the U.S. government might find Iran’s mullahcracy, it is most unlikely to cave in to either economic or military intimidation that would threaten the nation’s existence, and if backed up against the wall with no way out, would just as likely go for broke and use every weapon at its disposal to defend itself.”
What a load of hogwash! Closing the Strait of Hormuz is not a defensive act: it would be an act of unprecedented aggression. There is a big difference between the two.

Also: what makes sanctions as effective as they are (and there’s an entire debate to be had to that topic) is that it is not a deed of aggression – the victim cannot reasonably respond with military aggression.

The economic impact of sanctions can slowly errode the will of a people. The mullahs may not be affected. Their ability to do anything dangerous may disappear, just like Saddam’s WMD.
5. “Pearl Harbor occurred less than four months later.”
The end result of which was Nagasaki and Hiroshima. The Iranians will be aware of that, even if the author of the article appears not to be.

Will isolating Iran work, or just radicalize them?

I’m thinking trimming their ability to sell oil will be highly effective. Assuming the unbrave Mr. Obama is prepared to deal with $200/bbl.

I had hoped that by the time my teen-aged son became an adult that we would no longer be entangled in a war. It has always been one of my greatest fears as a parent to see him go off to war.

As a parent myself, I understand the fear. The expectation is unrealistic, nonetheless. The best a parent could hope for would be a temporary period of peace, as far as your homeland is concerned.

Iran is a society of well-educated, normal people. Their misfortune is to be led by a bunch of religious, fundamentalist whack-jobs.

But though they are whack-jobs, they are not crazy and irrational, and I suspect they know well what would happen to Iran should they close the Straights of Hormuz.

They have to know it would unleash a chain-of-events involving Western Europe, the US, and Israel, over which the Iranians would have no control, and whose unintended consequences would only have an adverse outcome for Persia.

Yes, there is a the Sunnit/Shi’a element which for most Americans adds an element of incomprehensibility and unpredictability. But I still think, Persions are essentially rational thinkers. Their country has a long and disguised history and despite what most of us see in the media, is cultured.

I’ll further add that the the Iranians also must move most of the oil China buys from them though the Straits of Hormuz providing much needed revenue for Iran.

I’n sure the Iranians are intelligent and pragmatic to realize that if they block the movement of oil to Western Europe through the Straits, that US and Western European naval forces will also stop the movement of Iranian oil.

Iran would not want that — their current stance is nothing but bluster.

As crippling and painful as it may be, I would welcome a steady increase to $200/bbl oil. In my opinion, it’s the only way to transition the American people and world away from petroleum. Sadly, the only way to get the majority of people to change, is to hit them in the pocket book.

To further Wendall’s point, here is a map of where Iran has it oil in addition to it’s refineries. The major port of Bandar Abbas is just west of the Strait of Hormuz and it is by far the farthest east major port. Basically, a blockade of Hormuz would hurt Iran just as much, if not more, than everyone else.

China has already cut Iranian oil imports by half. They want steep discounts on the 250k bpd they’re still buying. Europe is going to cut another 500k bpd. Japan is considering halving their 250k bpd as well. Iran may well see its oil exports cut by half, with the remaining half selling far below market value.

The world did okay without Libyan exports, so it will probably get by without 1.3m bpd of Iranian crude. BUT, this is going to put a world of hurt on Iran. The Rial has tumbled 40% in the last few weeks. Imagine the pressure Obama would be under if imports cost 40% more in such a short time. Talk about sticker shock at Walmart. I wouldn’t put anything past Iran’s leaders at this point.

I fail to see the logic, Perry!
First you say the world has already cut 1.3 m bpd of Iranian crude from the markets, essentially with no effect on price (for the buyers). Next you pull a 40% increase out of thin air. What did I miss?

The 40% increase was in the price of imports to Iran Optimist. That’s because the value of the Iranian currency has fallen 40%. The only country to cut Iranian oil imports so far is China. But, the EU just voted for the sanctions, and will soon buy their 500k bpd elsewhere, probably from KSA. Under these sanctions, any country that DOESN’T cut their Iranian oil imports will be hurt financially. These sanctions have teeth, and Iran is already suffering the effects. With Parliament elections just two months away, the Arab Spring could be coming to Tehran. Under these circumstances, the last thing we should expect from the ruling mullahs is rational thinking.

Jan 3 (Reuters) – The Iranian rial fell to a record low against the dollar on Tuesday following U.S. President Barack Obama signing a bill on imposing fresh sanctions against the country’s central bank.

The new U.S. sanctions, if fully implemented, could hamper the world’s major oil producer’s ability to sell oil on international markets.

The exchange rate hovered at 17,200 rials to the dollar, marking a record low. The currency was trading at about 10,500 rials to the U.S. dollar last month.

In my opinion, it’s the only way to transition the American people and world away from petroleum.

Biocrude~

You need to expand your horizons. Think methanol and passage of the Open Fuels Standard Act. The corn ethanol boys would fight it tooth and nail, but methanol and its derivatives such as methanol fuel cells and DME for ignition compression engines are our motor fuels of the future.

Perry,
Couple of things: interesting that the Europeans are willing to go along with sanctions, knowing that they will pay the price. I guess they didn’t get the memo that the end of cheap oil = the end of civilization.
Second, Iran is a complex country. They have elections, but candidates need to be “approved” by the mullahs. Hardly what one might call “free and fair elections” or democracy. The coming election does not mean the end of the mullahs, although another blatantly stolen election may make things real interesting.

I am convinced that war is an inherent human tendency. Throughout history we have fought one war after another. First it was for gold, now it is for oil. A war in the middle east is imminent. When that war will be ‘over’, there will be more wars.